COMMENT: Usually, whenever salary or income is mentioned, the numbers are expressed as the gross income. This is the amount that is earned before tax and other deductions.
When you’re applying for a mortgage, however, gross salary is of almost no value. That’s why the banks demand payslips. Payslips reveal how much you’re paying towards student loans, KiwiSaver, child support etc. In other words, what the bank really cares about is your net income - the amount that lands in your bank account every week, fortnight, or month.
Banks and financial advisers can often tell how in control of their finances a person is by how they refer to their income. It’s a subtle signal but people who have really thought about their budget will say something like “I receive $2,500 per fortnight into my bank account”. That person knows how much they receive in the hand and, therefore, knows how much they have to spend.
To work out your mortgage affordability, banks - who just love a good initialism - typically use UMI as their test. This stands for “Uncommitted Monthly Income” and is exactly what it sounds like. After all of your income has come in and all your expenses have gone out, UMI is what’s left.
Start your property search
It’s for this reason that I think that your monthly savings or UMI, rather than your gross salary, should be the new social flex. There are plenty of families on combined gross incomes of over $300,000 who are living pay-cheque to pay-cheque and there are plenty of first home buyers managing to save $2,000 or more per month on a salary of $80,000. In the long term, particularly in retirement, the savers will probably be in a far better position despite the reduced salary.
The new Credit Contracts and Consumer Finance regulations (CCCFA) will accelerate bank scrutiny of UMIs. It will no longer be OK for an applicant to say they’ll change their spending habits once they’ve have purchased a house. What you have spent and what you saved in the past 3-6 months is all that matters. If you’re looking to buy your first home, upgrade your current home or look at an investment property, commit to tidying up your spending over the next 3 months. Not only is this enough time to get into some good spending habits (and break some bad habits) but this is how long the banks will review to see how you live your life.
Finally, there are some very organised budgeters who withdraw a set amount of money to spend each pay cycle. This has previously been a good way to control your money; withdraw $400 every fortnight to spend on groceries and entertainment. When the money runs out, you can’t spend any more.
With the new financial regulations firmly in place though, I’d encourage you to think of another way to manage your money. The bank wants to see what you are spending your money on. $400 on groceries and some clothing is acceptable, but $200 on groceries and $200 on gambling tells quite a different story. If you’re spending cash, the bank can’t tell and it will raise a flag in their system. Maybe have a separate eftpos account that you keep your allocated budget in and keep an eye on it. It’s more painful to monitor but will be far less of an issue when you come to apply for a mortgage.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
